Page 4 - Al-Rashed Newsletter May 2020

POTPOURRI
WHEN THE DUST SETTLES

A RUNDOWN OF THE INDUSTRIES POST COVID

“When the dust settles…”
High quality and secular growth companies will structurally compound their earnings for longer led by market share
gains for the leaders and a robustness as manifested in “The Lindy Effect”. “The Lindy Effect” is a theory that the
future life expectancy of some non-perishable things like a technology or an idea is proportional to their current age, so
that every additional period of survival implies a longer remaining life expectancy. Where the Lindy effect applies,
mortality rate decreases with me. Basically, the businesses that survive COVID19 will have the ability to survive a lot
more and will be around for that much longer. It’s the equivalent of humans developing immunity to the virus and
becoming invincible as far as their business models are concerned. Take example of banks and lenders, even before
COVID19 the opportunity for credit creation was big with number of players becoming constricted and now post
COVID as the economy needs more credit intensity the number of strong players declines even further to the extent
that they can literally pick and choose customers.

“When the dust settles… auto sales will thrive” There is an expectation that once the lock down is over the hang over
of corona will take some me to get over in people’s mind and there would be high degree of consciousness to maintain
social distancing or at least to stay away from overly crowded and perceivably unhygienic public transport. The last
3-4 years has seen manifold increase in efficiency of the transport sector with the intervention of Uber, Ola and the
likes. In some consumer surveys of the past, it was observed that smartphones and experiences replaced personal
mobility in the case of the younger workforce. This CoVID episode should restore personal mobility. Choice between
Resilience and Efficiency! This would further lead to people buying cars/two wheelers or multiple cars within the
same family with multiple travelers; albeit with some down-trading on the budget.

“When the dust settles…” socializing will move from out of home to within home” or “When the dust settles…home is
not just a home”. Socializing is a human need since me immemorial and with this pandemic it’s just that the place of
socializing for some me might change. Hence, in home socializing and get-togethers will become less common.
Further especially in urban areas with the men and women spending couple of months at home, With higher reliance
on delivered food, food delivery apps and restaurant deliveries like Dominos could become indispensable. Actually the
utility of a home changes forever…it becomes a mini office, it becomes a mini theatre, it becomes a mini entertainment
zone, etc…and whoever can afford or organize will make transformation where they need and want to…in that order.

“When the dust settles…..” how people care about their health and wealth will change forever” The most important
realization in this pandemic is the importance of both good health and financial health so how a person takes care of it
will change forever. From a health point of view, people will be more careful with the lifestyle they are living and hence
will become more disciplined. Sectors like life insurance, health insurance and diagnosis could grow more. Also the
importance of savings both for individuals and companies hasn’t been felt the way it is being felt in this phase. Hence
this could bring about some change in earn and consume attitude of people. Financializaton of savings will be a bigger
trend than it has been in the years to come.

“When the dust settles....” new leaders will emerge basis strategies that will play off based on financial strengths…
there could be a flurry of investments in acquiring or building digital capabilities. Once we are out of the lockdown,
intellectual property without enough capital will have serious limitations and only those companies which will have
enough cash on the balance sheet both from own resources or from credible lending sources (say banking
subsidiaries etc.) will not only survive but will thrive, large part of the world will be cash starved and will be looking at
repair capital. They may have to bite the bullet of survival at a high cost of capital; both in equity and in debt. In equity
they will borrow by discounting from their future potential where they have likely growth and that growth they will sell
cheaply to present intruders (or white knights as the text book calls them). The ones who have cash on hand will be
able to acquire digital capabilities and might be spoilt for choices.